Financial Authorities Convene Financial Sector Ahead of July DSR Regulation... Urge Household Loan Management

[Asia Economy Reporter Kwangho Lee] Financial authorities are convening executives from financial associations ahead of the borrower-specific Debt Service Ratio (DSR) regulation set to take effect from the 1st of next month. This is interpreted as a preemptive move to pressure household loan management, as there could be a surge in speculative demand before the regulation is implemented.

According to financial authorities on the 17th, the Financial Services Commission plans to meet with executives from financial associations including the Korea Federation of Banks, the Life Insurance Association, the General Insurance Association, and the Credit Finance Association to review preparations for household debt management measures and convey requests.

Earlier, on the 4th, financial authorities summoned credit officers from sectors such as banking, insurance, and capital to check household loan trends.

Under the household debt management measures, starting next month, the borrower-specific DSR 40% regulation, which currently applies to new mortgage loans for homes priced over 900 million KRW in speculative and overheated speculation zones, will be expanded to cover homes priced over 600 million KRW in all regulated areas. For unsecured loans, the income condition will be removed, and the regulation will apply to loans exceeding 100 million KRW. Approximately 83.5% of apartments in Seoul and about 33.4% of apartments in Gyeonggi Province will be subject to this regulation.

From July next year, the DSR regulation will apply to borrowers whose total loan amount exceeds 200 million KRW for both mortgage and unsecured loans, and from July 2023, the regulation will expand to borrowers with total loans exceeding 100 million KRW. Currently, borrowers with total loans exceeding 100 million KRW account for 28.8% (about 5.68 million people) of all borrowers, representing 76.5% of the total loan amount.

Through the household debt management measures, financial authorities aim to reduce the double-digit household debt growth rate back to pre-COVID-19 levels of around 4% by next year. This year, considering the COVID-19 situation, the goal is to manage it around 5-6%.

Despite the financial authorities' repeated tightening of household loans, the upward trend has been difficult to curb. Although the increase in household loans in the financial sector slightly decreased last month, this was largely due to a temporary sharp drop in unsecured loans caused by refunds from SK IE Technology (SKIET) IPO subscription. This month, demand is expected to surge again before the regulation is introduced, making a return to an increasing trend highly likely.

This is the background for the financial authorities' expected measures through financial associations, such as reducing loan limits. In the market, there are also expectations that the authorities will intensify orders due to concerns about a balloon effect in loans from the secondary financial sector. In fact, from January to May this year, the household loan growth rate in the secondary financial sector was 17.8%, a significant increase compared to -4.8% the previous year.

Meanwhile, commercial banks are managing household debt by reducing preferential interest rates and suspending the sale of some loan products.

Woori Bank has decided to reduce preferential interest rates on five types of personal unsecured loan products, and NH Nonghyup Bank will reduce loan limits and cut preferential interest rates. Starting today, Nonghyup Bank will temporarily suspend sales of Mortgage Credit Insurance (MCI) loans and Mortgage Credit Guarantee (MCG) loan products, and from the 16th, it will also lower preferential interest rates on jeonse loans, unsecured loans, and real estate-secured loans other than housing.

An association official said, "It is expected that (financial authorities) will request cooperation to ensure the smooth implementation of household debt management measures," adding, "We will support the government's policies to be carried out smoothly."

This content was produced with the assistance of AI translation services.